Treasuries Decline as Dollar’s Rise Versus Yen Damps Demand

By Susanne Walker and Cordell Eddings -
May 9, 2013

Treasury 30-year bonds fell, pushing
yileds to almost a one-month high, after the dollar strengthened
beyond 100 per yen for the first time in four years, damping
demand for U.S. government securities.

Treasuries rallied earlier as an auction of 30-year bonds
drew a yield of 2.980 percent, compared with a forecast of 2.997
percent in a Bloomberg News survey of nine of the Federal
Reserve’s primary dealers. Yields had increased since May 3 when
a report showed strong-than-forecast jobs growth and
unemployment at a four-year low. Bill Gross, co-chief investment
officer at Pacific Investment Management Co. raised the holdings
of Treasuries held in his flagship fund to the highest level
since 2010.

“The move is a stronger dollar versus everything that has
caused a technical move in foreign-exchange markets,” said
Richard Gilhooly, an interest rate strategist at Toronto-Dominion Bank’s TD Securities unit in New York. “That’s
weighing on bonds.”

The 30-year bond yield rose one basis point, or 0.01
percentage point, to 2.99 percent at 4:59 p.m. New York time,
according to Bloomberg Bond Trader prices. The 3.125 percent
bond due in February 2043 fell 3/32, or $0.94 per $1,000 face
amount, to 102 19/32. The yield fell as much as four basis
points, after it rose to 3.02 percent yesterday, the highest
level since April 4.

The yield on the May 2023 securities sold yesterday was
little changed at 1.81 percent.

Japanese Demand

While Bank of Japan’s Governor Haruhiko Kuroda’s April 4
announcement doubling monthly bond purchases spurred speculation
that domestic money managers would seek higher yields in the
U.S. and other markets, Japanese investors cut holdings of
overseas debt for a sixth-straight week in the period ended
April 19, the longest streak since January 2010, Ministry of
Finance data show. The MOF is scheduled to report the data,
covering the past two weeks, this evening.

At today’s U.S. bond auction, indirect bidders, an investor
class that includes foreign central banks, purchased 38.8
percent of the notes, compared with an average of 36.5 percent
for the past 10 sales.

“We should expect more Japanese related flows to begin
entering our market as they likely have this week,” said
Christopher Sullivan, who oversees $2.1 billion as chief
investment officer at United Nations Federal Credit Union in New
York. “We’ve seen overseas interest. A lot of the demand behind
that could be Japanese buyers,” he said, referring to the
auctions.

Auction Bidding

The bid-to-cover ratio, which gauges demand by comparing
total bids with the amount of securities offered, was 2.53,
compared with an average of 2.6 for the previous 10 sales.

Direct bidders, non-primary-dealer investors that place
their bids directly with the Treasury, purchased 15.5 percent of
the notes, compared with an average of 14.2 percent at the last
10 auctions.

“There remains demand for safety and quality out there,”
said Larry Milstein, managing director in New York of
government-debt trading at R.W. Pressprich & Co.

The sales will raise $12.4 billion of new cash, as maturing
securities held by the public total $59.6 billion, according to
the Treasury. (USGG10YR)

Bidding has slowed at Treasury auctions this year, with the
$793 billion in debt sales attracting an average of $3 in orders
to buy per dollar of debt sold, compared with a record $3.15 in
2012, according to data released by the Treasury and compiled by
Bloomberg.

Yield Forecast

The yield on the 10-year note is forecast to end the year
at 2.20 percent, according to the median estimates of economists
in a Bloomberg News survey May 3 to 8. The figure is down from a
forecast of 2.25 percent in a Bloomberg News survey conducted
April 5 to April 9. Thirty-year bonds may yield 3.25 percent at
the end of the year, compared with a forecast for 3.37 percent
in the previous survey.

The Fed reiterated its pledged last week to buy U.S. debt
as it tries to spur the economy.

The Fed is buying $85 billion of Treasury and mortgage debt
each month to support the economy by putting downward pressure
on borrowing costs. It purchased $1.4 billion of TIPS maturing
between April 2018 and February 2043 today, according to the Fed
Bank of New York’s website.

Other central banks have also increased asset purchases or
cut rates. The European Central Bank last week cut its key
interest rate week to 0.5 percent from 0.75 percent.

Pimco’s Gross raised the holdings of Treasuries held in his
$292.9 billion Total Return fund at Pimco to 39 percent last
month, the highest level since July 2010. Gross has been
advising investors to sell risk assets and buy government debt,
including inflation-linked securities and nominal Treasuries as
central banks pursue unprecedented stimulus measures.